Alternative Models of Financial System Development

Dramatically different systems of corporate finance and governance have emerged among the major industrialised countries in the postwar period. Even the casual observer notices large differences between the way firms finance and govern themselves in the United States and United Kingdom on the one hand, and in Japan and Germany on the other. In this paper I describe how firms obtain external finance and how the primary mechanisms of corporate governance operate in these four countries. In addition, I consider where the Australian financial system fits in on the spectrum that has the United States and United Kingdom on one end and Japan and Germany at the other. I analyse reasons for the dramatic differences observed in corporate finance and governance systems. I discuss some of the costs and benefits of each system. Finally, I evaluate the current pressures to change that each system is under, and make some prophecies as to how corporate finance markets will evolve in the future in each country.